General market tone: Risk-off. Trump gave the go-ahead signal to implement tariffs on Chinese imports worth up to $200 billion even after both the US and China appeared amenable to high-level talks in the near term to smooth out differences. China has threatened to walk away from the negotiating table should the US push through with the tariff salvo.
Positive economic data for August released this week instilled some life in the Indian rupee (INR). But the worst isn’t over just yet. We expect the central bank to raise rates by another 50 basis points before the year-end, and wouldn’t be surprised if it hikes by more than that. But we aren’t changing our view of the USD/INR trading up to 73.50 by end-2018
Lower inflation and the external trade deficit data for August this week provided a break in the Indian rupee (INR) sell-off underway since early August, lifting the currency by 1.2% from an all-time low of 72.70 against the USD hit earlier in the week. The softer USD against G-10 currencies, and by extension against emerging market currencies, also deserves mention. We aren’t too excited though, as we consider the recent dip in inflation and trade balance reversible. So is the dip in the USD/INR rate. Despite some gain, the INR remains one of the Asian underperformers with depreciation on a week-on-week basis. We are sticking to our view of the USD/INR rising to 73.50 by end-2018.
Strong domestic demand has driven imports higher, pushing the current account gap to $3.1 billion in the first half of the year, or -1.9% of GDP. We expect the deficit to deteriorate further to between -2.3% and -2.9% of GDP
Strong domestic demand has driven the current account imbalance through higher imports. Domestic demand jumped by 9.2% year-on-year in the first half from 6.7% in the same period last year. We expect domestic demand, on average, to grow by 8.2% in 2018 from last year’s 6.9%. Strong import growth reflects this with an average increase of 13% in the first half.
Exports, on the other hand, contracted by 3.4% in the first half. Weak exports and strong imports combined to push the trade deficit up by 61% to $19 billion in the first half of the year. Overseas remittances during this period only posted a 2.6% year-on-year increase to $14.2 billion, which is $4.7 billion short of financing the trade gap.
The shortfall is now the norm and drives the wider current account deficit. The current account deficit amounted to -$3.1 billion in the first half, which is the central bank's deficit forecast for the full year. We estimate this gap to be equivalent to -1.9% of GDP.
The outlook is unlikely to show any improvement. We expect this year’s current account deficit to amount to between -$7.7 billion and -$9.8 billion or between -2.3% and -2.9% of GDP. This imbalance is increasingly weighing on the Philippine peso though capital inflows and a hawkish central bank could moderate or offset the weakening bias.
Natural disasters are not the time to be finessing GDP forecasts